1. asset
class iQ
The Cost of Fear
By Sheldon McFarland, VP, Portfolio Strategy and Research
What are you worrying about today? If you are an investor, you’ve the market from November 2008 to November 2012. That’s
had plenty of choices recently: Congressional Stalemate, troubles the cost of fear!1
in the Euro zone, the economy, Housing, the National Debt,
Growth of $100,000 from November 2008
Obamacare. The list seems to go on and on.
to November 2012
While it may seem like we live in especially worrying times, the
$180
fact is — we are always going to worry. It is simply human Cash Market
nature. Our brains are wired to worry about things we think $160
might harm us. It’s a survival mechanism that protects us from $140
danger. It’s our ancient “caveman” brain, the part of our brain
$120
that tells us to jump out of the way of a speeding car or avoid a
Thousands
hot stove…or panic about Greek debt. $100
$80
This part of our brain — known as the amygdale — stores
memories of past trauma — including investment trauma, $60
Nov. 2008 Nov. 2012
such as losing money in the stock market.
“Cash” represented by One-Month U.S. Treasury Bills, “Market” represented
And if we’re not careful, our caveman brain can take over and
by S&P 500 Index. Source: Morningstar Direct. The S&P data are provided by
cause us to make irrational decisions that can harm our port- Standard & Poor’s Index Services Group. The S&P 500 (Standard & Poor’s 500
folios. This is what I call “The Cost of Fear.” Index) is a broad-based US equity index. The S&P 500 Index is an unmanaged
market value weighted index of 500 stocks that are traded on the NYSE,
For example, imagine it is October 2008 and you have $100,000 AMEX, and NASDAQ. The weightings make each company’s influence on
the index performance directly proportional to that company’s market value.
invested in the market. The market is falling and many pundits Indexes are unmanaged baskets of securities that are not available for direct
and prognosticators are predicting economic doomsday, even investment by investors. Their performance does not reflect the expenses associ-
the end of Capitalism. ated with the management of actual portfolios including, but not limited to, tax
deductions and management fees. Past performance is no guarantee of future
Do you give in to fear and sell your stocks and sit in cash like results, and values fluctuate. All investments involve risk, including the loss of
principal.
many investors did — or even stock up on guns, gold and
dehydrated food? Jeremy Siegel said, “Fear has a greater grasp on human action
than does the impressive weight of historical evidence.”2 This
Or do you keep your caveman brain in check and stay invested?
helps explain how even though decades of history tell us markets
If we fast forward to today, your decision to sell and move to correct an average of 24 months after a decline, investors still
cash would have cost you over $60,000 — that’s the difference give in to their fear and liquidate their stock portfolios, usually
between $100,000 invested in cash and $100,000 invested in after the market has significantly declined.
“Cash” represented by One-Month U.S. Treasury Bills, “Market” represented by S&P 500 Index
1
Jeremy Siegel, “Stocks for the Long Run,” McGraw-Hill, 2007
2
